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Advocates Ask the State to Close Tax Loophole

Closing what is known as the carried interest loophole would generate $535 million a year in tax revenue for Connecticut. (PublicDomainPictures/Pixabay)
Closing what is known as the carried interest loophole would generate $535 million a year in tax revenue for Connecticut. (PublicDomainPictures/Pixabay)
March 22, 2016

HARTFORD, Conn. - Advocates for Connecticut's poor and people with disabilities say the state could generate more than a half-billion dollars in revenue each year by closing a loophole that benefits hedge-fund and private-equity managers.

The federal government gives those very high earners a big break by treating their income as capital gains, collecting only a little more than half the taxes others pay.

Sheldon Toubman, staff attorney with the New Haven Legal Assistance Association, testified at the General Assembly's Finance, Revenue and Bonding Committee on Friday, saying closing that loophole would level the playing field.

"What we would do is impose a state tax equal to the amount of that federal tax loophole," says Toubman. "So, the net result for these individuals is that they would really be paying the same as their neighbors who make the same amount of money."

There is currently no active bill to close what's known as the "carried interest loophole" in the Connecticut Legislature, but similar legislation has been proposed in New York State.

If any one state closes the federal loophole, those high earners could simply move across the nearest state line.

So, Toubman suggests that, like the New York bill, Connecticut might pass a law that would only go into effect when neighboring states adopt similar legislation.

"So, it wouldn't matter if you lived in New York or New Jersey, or Connecticut or Massachusetts," he says. "Your taxes on the state level would make up for that loophole to the same degree."

Connecticut is facing growing budget deficits, and this year's budget includes a proposed five percent across-the-board cut to state agencies.

Layoffs have already started.

Toubman says reductions in state services disproportionately affect those most in need, so he and others who testified urged legislators to look at both sides of the equation.

"Unless we address the revenue side of our budget situation, we're going to see even more serious cuts," he says.

Connecticut's budget deficit, now estimated at $220 million, is expected to grow to $900 million next year.

Andrea Sears, Public News Service - CT